In my original review on Elite Commercial REIT’s IPO, I concluded by saying that I wasn’t sure whether I would apply for this IPO.
I really like the stability of cash flows, the yield, and the long-term visibility of earnings. But at the same time, I didn’t like the small cap nature, the (lack of) track record from the Sponsor, and the entire Wuhan Flu situation.
I concluded by saying that I needed more time to think through the issue, and I would make my decision before the IPO.
Now quite a few of you guys have left comments or written in to share your thought process on whether to apply for this IPO, so a big shout out to each and every one of you who did. Truly touched by the open sharing of information, and from the bottom of my heart, I sincerely thank you!
In any case, I’ve made up my mind to skip this IPO, and I thought it only fair that I return the favour by updating you guys on my thinking. My final decision was predicated on a factor that I didn’t consider in my original article:
Lack of Upside by applying for the IPO
And the thinking goes like this.
There are 2 reasons why you would apply for a REIT at IPO:
- You think the price will jump at IPO day – If so, it makes sense to lock in the IPO price to earn capital gains
- You want to build a large stake – If you think post-IPO trading liquidity will be low, and you’re looking to build a large stake, it makes sense to apply for the IPO
Now I don’t think the price will jump on IPO day. Sure, the REIT is great, it has strong underlying cash flows and nice yield, and the public tranche is small as hell (5.7 million units). But it’s also not Astrea IV level of hot, and with the Wuhan virus and markets in risk-off sentiment, I just don’t see people rushing out there to apply for this IPO (I could be wrong though – don’t kill me if I am).
And point 2 is a non-factor, I’m a small-time player, and any amount I want can easily be fulfilled in the open market.
At the same time, I actually see the potential for downside risk here. This IPO is dominated by private wealth. Is it a big stretch of imagination to see some of these investors getting cold feet and deciding to pare down their stakes on IPO day? I mean just look at what is going on globally.
So in a way, I personally see the risk as being skewed to the downside here, but feel free to disagree with me in the comments.
After all, let’s say I get it right with my call. The IPO sells like hot cakes. Trading opens at £0.68 and trades up to maybe £0.69. Yay.
Let’s say I get it wrong. Trading opens at £0.68, slides to £0.66 to close, and continues sliding over the next few days / weeks. In this scenario, I lost money on this investment simply because I didn’t wait to see post-IPO price action.
At the same time, the macro sentiment over the past few days has degenerated quickly. It’s still super early days, but I’m starting to see investors in mild panic mode. Price action from global markets is also not great, with cyclicals taking a beating and yield curves reinverting. In such a climate, do I really want to be subscribing for an IPO? Absolutely not. Regardless of how sound an investment may be, in times of panic, bad things still happen.
I’m keeping the 3.5 Horse Rating for Elite Commercial REIT because objectively, I really like this REIT. The long-term earnings visibility is absolutely terrific, and at 7.1% yield the risk-reward is more attractive that many other high yield bonds out there. The problem is that I just don’t see any need to take my chance at the IPO, when I can easily wait for post-IPO to see how this trades in the open market.
So I’m going to adopt a wait and see attitude here. If price drops post-IPO, I might just pick up some of this REIT. If it stabilizes, it could also be attractive as a 7.1% GBP bond. If it jumps big time on IPO day, then well, I’ll have to do a post to reflect on where I went wrong, but I’ll just use my money to invest in the China stocks that are going to take a beating in the next few weeks.
What about you guys? Are you subscribing or skipping Elite Commercial REIT’s IPO?
Note: The original review of Elite Commercial REIT IPO is set out in full below, so read on for the pros and cons of this REIT!
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Elite Commercial REIT IPO Review: 7.1% yield backed by the UK Government – too good to pass up?
2020 has been one hell of a year so far. January is barely even over, and we’ve already had a close shave with WWIII, Australian wildfires, Locusts in Africa, Kobe Bryant’s passing, and now the Wuhan Corona Virus. I’ve had enough excitement for the year, thank you very much.
And amidst all that chaos, comes Elite Commercial REIT’s IPO. I had a healthy dose of scepticism about Elite Commercial REIT when going through the preliminary prospectus (as evidenced in my original article here), but now that the final prospectus is out, I actually quite like this REIT.
Basics: What is Elite Commercial REIT?
Elite Commercial REIT is a small cap ($230 million aprox) REIT that holds commercial office buildings in UK. A total of 97 commercial buildings to be precise, scattered all over the UK, as set out below.
Gearing on launch will be 33.7%, and indicative yield is 7.1%, price to book is about 1.03x approximately.
Let’s start with the stuff that I don’t like about Elite Commercial REIT.
One of the big doubts I had in my original article was what the stakes of the sponsors would be like post-listing, and what the alignment of interest would be like.
Well, the numbers are set out below, and it looks a lot like the biggest unitholders are paring down their stakes, on a percentage basis.
The sponsors will collectively hold around 19% of Elite Commercial REIT post listing (assuming over-allotment option is exercised – which is likely given the small public offer). It’s a decent stake, but I would have preferred to see something much closer to 30%, along the likes of what CapitaLand and Mapletree do.
The cornerstone investors that will take up a huge chunk (23.4%), is private wealth, coming via UBS, Bank of Singapore (OCBC) and CIMB. I would have preferred to see big institutional names like Blackrock and the likes come in rather than private wealth, since greater ownership by private wealth typically results in greater volatility in share price.
But to be fair, given the small size of Elite Commercial REIT’s IPO, I can’t really fault the big boys like Blackrock for not wanting to come in.
Another thing to note is that this is the first REIT sponsored by Elite Partners, so we don’t have full clarity on their track record. A couple of the guys behind Elite Partners were from the original Viva Industrial Trust / Cambridge Industrial Trust (sold to ESR eventually). Both Viva and Cambridge Industrial did okay as a REIT, so hopefully that track record carries over here.
Forex risk is another huge one here.
The underlying properties are located in the UK, so naturally they are denominated in British Pounds (GBP), as are the distributions.
The long term chart of the GBP against the SGD is set out below, and it’s not pretty.